Beijing VRV Software Corporation Limited's (SZSE:300352) Shares Climb 39% But Its Business Is Yet to Catch Up

Beijing VRV Software Corporation Limited (SZSE:300352) shareholders would be excited to see that the share price has had a great month, posting a 39% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 4.2% isn't as impressive.

Following the firm bounce in price, you could be forgiven for thinking Beijing VRV Software is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 12.1x, considering almost half the companies in China's Software industry have P/S ratios below 5.2x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Beijing VRV Software

What Does Beijing VRV Software's P/S Mean For Shareholders?

For instance, Beijing VRV Software's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Beijing VRV Software's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Beijing VRV Software's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 5.6% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 17% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Beijing VRV Software's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On Beijing VRV Software's P/S

Shares in Beijing VRV Software have seen a strong upwards swing lately, which has really helped boost its P/S figure. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Beijing VRV Software revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Beijing VRV Software (at least 2 which are concerning), and understanding these should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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